Incentive conflict in the international, regulatory agreement on risk-based capital

Abstract

Historically, financial Institutions and systems of financial regulation have had a country-specific character. National variations in Institutional and regulatory patterns are protected by costs related to distance and to differences in culture, currency, and language that functic is barriers to entry for foreign firms. In recent years technologically driven downward trends in these costs have increased the intensity of international competition. This increase imposes mounting market discipline at only on a nation's financial-services firms but on its financial regulators as well. Increased discipline makes it harder for autonomous Financial regulators in different countries to impose or to maintain burdensome differences in the rules of financial competition. Because it may dissipate the benefits of trade in financial services, intergovernmental regulatory cooperation is not necessarily a good thing. It is fundamentally cartel behavior and subject to principal-agent conflict. To justify the 1988 risk- based capital agreement, most Western officials' framed the globalization a financial markets as if it posed a direct and manifest threat to the stability of the world financial system. However, the roots of whatever threat exists is apt to reside more in the possibility of maladapted regulatory responses to globalization than in the possibility of inherently saladapted private decisions.